Contracting Out - Chapter Five

The Department of Energy, as well as its predecessor agencies, has always relied on the management and technical expertise of the private sector for the operation of its weapon production and scientific and engineering facilities and sites. The objective of the management and operating (M&O) contract concept is to bring management expertise and commercial operational practices to bear in the operation of the Government’s scientific, engineering, and production facilities. Because the management and operation of the facility or site is in direct fulfillment of the Department’s mission, M&O contractors operate more as an extension of the Department and less as a true private enterprise. In consideration of national security and other concerns, the M&O contractor has traditionally performed many, if not all, of the functions associated with operating a site or facility. As a result, M&O contractors have not relied heavily on contracting out to improve either operational efficiencies or cost-effectiveness. Accordingly, activities within the Department under the heading of “contracting out” include the transfer of both traditional government enterprise and M&O contractor activities to the private sector.

Contracting out can take many forms, including the relatively straightforward award of a contract for services, long-term arrangements that involve innovative private project financing, lease-back of capital equipment, or long-term per-unit fees for service. In contrast with a functional divestiture, DOE retains a substantial continuing relationship under contracting out arrangements—often as a primary, and sometimes as the only, customer. In some circumstances, however, contracting out can provide a transitional mechanism for eventual divestiture.

The Contract Reform Team Report issued in 1994 recommended that DOE decrease its reliance on M&O contracts to accomplish required activities. The report recommended that the Department improve its “make/buy” decisionmaking process and explore more cost-effective contracting strategies. (The “make/buy” decisionmaking process analyzes whether it makes sense for the Department—Federal employees or M&O contractors—to make a good or provide a service instead of buying a good or service from outside sources.) The Secretary’s Strategic Alignment Team reinforced the Contract Reform Team’s recommendations by emphasizing downsizing, cost controls, and alternative contract mechanisms. Thus, contracting out represents a privatization strategy that directly flows from and effectively complements reform efforts aimed primarily at the traditional M&O contracting system.

In seeking cost efficiencies, DOE is looking to commercial entities outside the traditional M&O community as possible sources for performing work, either directly or through a subcontract administered by a management contractor. As with contract reform, successful privatization of traditional Federal functions will depend on the Department being able to move from cost-reimbursement contracts with broad statements of work to more narrowly defined, fixed-price or incentive contracts that are competitively awarded. While the Department intends to shift risk to private industry, the success of contracting out will require striking a balance between the Government’s needs to achieve cost savings and industry’s need to ensure a reasonable return on investment.

This chapter is divided into four sections. The first section discusses decision analysis for considering contracting-out proposals. The next section addresses the tradeoffs between risk and cost embodied in theterms and conditions of the contract. The third section discusses transitional issues in converting activities formerly conducted by the Government or M&O contractors to other entities (non-M&O contractors, State and local governments, nonprofits, and so forth). The fourth section raises post-award contract administration and management issues. Although presented separately, these four elements—analysis, terms and conditions, transition issues, and management—are interrelated. For example, the analytical decision to contract out must consider the likely terms and conditions to evaluate the risk-cost profile of a proposed contracting out. Post-award management issues depend on the terms and conditions of the contract as well as the conversion strategy employed.

The Federal Government procures many goods and services from the private sector and has established a framework for deciding whether or not to contract out work currently performed by Federal employees. The primary guidance is contained in Office of Management and Budget (OMB) Circular A–76 (August 4, 1983) and in the revised “Supplemental Handbook” (March 1996). Unlike the case with other Federal Executive agencies, however, the majority of the Department of Energy’s contracting-out considerations are not subject to OMB Circular A–76 because most of the Department’s identified contracting-out opportunities are currently performed under M&O contracts. Moving portions of that work into the private sector is not subject to the provisions of A–76 but, rather, must comply with the provisions of the Department’s Acquisition Regulation concerning make-or-buy plans.

1. The Government contracts directly with the private sector for work that was done previously by Federal employees—for example, the privatization of the Department’s technical library in the 1980s.

2. The Government withdraws portions of work that were previously performed by an M&O contractor and contracts with another party in a manner that shifts more risk to the contractor and is less costly to the Government—for example, the privatization of the Hanford Tank Waste Remediation System.

3. The M&O contractor subcontracts a portion of its contract work pursuant to a DOE-approved make-or-buy plan.

This chapter primarily addresses the second and third types of contracting out. These two types of contracting out are illustrated by recent privatization activities undertaken by the DOE’s Office of Environmental Management (EM). In recent years, EM has focused aggressively on privatization thatinvolves the purchase of an end-product or a service, such as treated waste, remediated soils, or services (power generation, for example). The EM privatizations have ranged from the multi-billion dollar Tank Waste Remediation System at the Hanford Site in Washington State to much smaller service contracts for cleaning contaminated laundry, treating sanitary waste, or providing power. Under the EM approach, the contractor is responsible for completing the work to deliver the product or service, and the product or service is delivered to DOE in accordance with contract specifications. If the EM privatized work involves facilities, the approach has involved contractor-owned and -operated facilities and has required private financing. The EM privatization process also has required contractor selection under open fixed-price competition.

Under the Contract Reform Initiative, DOE has proposed revisions to its regulations affecting make-or-buy analysis. The Department published its new approach in a Notice of Proposed Rulemaking issued June 24, 1996. Under the revised regulation, DOE will require an M&O contractor to develop and implement a make-or-buy plan that establishes a preference for providing property and services (including construction and construction management) on a least-cost basis, subject to program-specific make-or-buy criteria. Program-specific make-or-buy criteria reflect specific mission or program objectives (such as national security, environment, safety and health, and workforce displacement and restructuring). These factors may be more important than a purely economic (that is, least-cost) rationale. The emphasis of this make-or-buy structure is to eliminate bias for in-house performance where an activity may be performed at less cost or otherwise more efficiently through contracting out. In developing and implementing its make-or-buy plan, a contractor will be required to assess contracting-out opportunities and implement contracting-out decisions in accordance with the following criteria:

1. Contractors will actively support internal productivity improvement and cost-reduction programs so that in-house performance options can be made more efficient and cost-effective.

2. Contracting-out opportunities will be considered with the maximum practicable regard for open communications with potentially affected employees and their representatives. Accordingly, contractors will openly discuss their plans, activities, cost/benefit analyses, and decisions with the many stakeholders affected by such decisions, including representatives of organized labor, communities, and local businesses.

3. Consistent with the requirements of section 3161 of Public Law 102–484, the National Defense Authorization Act for FY 1993, regarding reconfiguration at defense nuclear facilities, the social and economic impacts of contracting-out decisions, including workforce displacement or restructuring, will be mitigated to the extent practicable.

In addition, under the Contract Reform Initiative, the Department also developed more detailed criteria and decision tools for contractors to consider in analyzing and recommending make-or-buy actions, and for the Department’s contracting officers and programmatic sponsors to use in evaluating those recommendations. The result was the Make-or-Buy Decision Tree (see Appendix B), which has been updated to reflect proposed rulemaking language and questions raised during implementation efforts to develop a cost model. The Make-or-Buy Decision Tree addresses each of the following criteria:

• Availability of the service or product from a commercial enterprise or other source

• Impact of a “buy” decision on national defense capability, special weapons safety, or security

• Impact of a “buy” decision on objectives for technology transfer or research advancement

Potential stakeholders affected by make-or-buy decisions include businesses or other entities with the capability to provide a product or service under consideration for contracting out, the prime contractor’s workers (and their representatives) whose jobs could be affected by a decision to contract out, and the local communities where the affected workers live. These different stakeholder groups should be consulted early regarding contracting-out decisions and given the opportunity to provide input to a make-or-buy analysis. Such consultations may identify new issues or alternative approaches to accomplishing the cost and performance goals of the contracting-out action. They should also foster more cooperative relationships among all of the affected parties at a site.

The Make-or-Buy Decision Tree recommends that potential sources for contracting out be identified through market surveys or other appropriate means. Such surveys could be a means for identifying potential suppliers, notifying them of DOE’s plans, and even soliciting their advice regarding the procurement.

In addition to the Department consulting with affected employees on work force restructuring, the contractors should involve their work force up front in make-or-buy analyses to help ensure a thorough analysis of the costs of current operations and consideration of all viable alternatives to reduce costs. Such employee involvement is a common feature of most high-quality organizations. There is little rationale for contracting out for a product or service if the current workforce can provide it with acceptable quality and at a competitive cost.

DOE program offices and field locations are currently investigating the use of several commercial modelsfor performing least-cost analysis as well as developing cost models for specific procurements. Determining which costs should be considered in making a comparison is very important and a subject of debate among various stakeholders. For example, the results will vary considerably depending on whether costs associated with worker transition, life-cycle costs for an extended period, or savings due to cost avoidance are considered. Section VII of the Make-or-Buy Decision Tree (Cost Issues) was designed to ensure that all applicable cost differences, cost avoidances, and other relevant benefits are considered in a make-or-buy decision.¹

Generally speaking, competition for the disposition of assets or the procurement of goods or services is an effective way to ensure that the Government obtains the best value for the taxpayer. Competition stimulates “sharp pencils,” in financial terms, and motivates contractors to put forward their most innovative thinking when technical solutions to problems are desired. This competition may serve the privatization interest by helping to ensure the best price as well as to determine the best approach for the effort. In the case of asset disposition, competition may also serve to establish a market for pricing purposes when fair market value is not readily identifiable.

For these and other reasons, Federal and departmental policy generally requires that procurement, financial assistance, and certain property dispositions be accomplished through competitive processes. The Competition in Contracting Act, for example, requires the use of “full and open competition” in the procurement of goods and services—except under limited circumstances defined in the act.

Competition, or at least, traditional competitive processes, however, may not always be in the Government’s best interest. Competition may conflict with other departmental objectives. For example, an immediate competition for the privatization opportunity may foreclose local community participation. In certain circumstances, there may be a public interest in providing short-term transition assistance to the community (such as providing a noncompetitive government contract or offering to sell or lease a facility on favorable grounds.) Thus, when other objectives (such as community transition) are also important, the Department must weigh the public interest in achieving those other objectives against the benefits of competition. The Department should also consider structuring a competitive process for facility or site disposition that can achieve other important objectives and recognize that the best overall value to the Government may not be based on financial value alone. Such a competition should provide incentives for the private sector to maximize return to the Government while also addressing other governmental objectives. The competition could, for example, include as an evaluation criteria the experience of prospective offerors in developing community job and training opportunities or reemployment of displaced workers.

The requirement to competitively procure services may inhibit some of the Department’s privatization initiatives, especially projects that contemplate using contracting out as a transition to eventual functional divestiture. For example, the Department has identified a number of small laboratories and facilities, parts of which may no longer be required to serve the Department’s needs. Private commercial entities have expressed an interest in buying or leasing these facilities and redirecting the excess capacity fornongovernmental purposes. These commercial entities are interested in converting these facilities or laboratories from Federal to private control and are often willing to contribute private capital to commercialize the operations. However, given the risk associated with developing such new ventures, the commercial entities are interested in providing the Government’s continuing requirements while developing related business opportunities. Assuring a source of revenue (through the government contract) to the private entity while it establishes the commercial viability of its operations makes the opportunity more attractive to private investors and more likely to be successful. However, in the event that the Government is required to compete the contract for the continuing services, the private entity may not be interested in privatizing the Federal operations.

To date, DOE has found sufficient flexibility in Federal law and regulations to accomplish its objectives in those cases when a typical competitive process does not serve the public interest. However, this situation will be monitored to determine if greater flexibility may be needed in the future to achieve privatization objectives.

The Department should consider the entire range of potential contractual vehicles in analyzing contracting-out candidates. Beyond real-estate transactions (which may include leases and sales agreements), the most common contractual vehicles used in DOE are procurement contracts, cooperative agreements, and grants.

The Federal Grant and Cooperative Agreement Act establishes the following criteria for selecting the appropriate contract vehicle:

• A grant is used when the principal purpose of the relationship is to carry out a public purpose of support or stimulation authorized by law, and substantial involvement is not expected between the Government and the recipient. For example, a grant may be given to a historically black college to support its energy and science programs in the case when the Department does not intend to actively participate in the program. This serves the public interest by stimulating the sciences related to energy use.

• A cooperative agreement is used when the principal purpose of the relationship is to carry out a public purpose of support or stimulation and substantial involvement is expected between the Government and the recipient. For example, a cooperative agreement may be entered into with a national association of energy providers to support training and outreach activities. In this case, the Department would expect to participate actively in the development of the agenda and in sending participants to the meetings.

• A procurement contract is used when the principal purpose of the arrangement is to acquire property or services for the direct benefit or use of the Government. For example, theGovernment would place a contract to buy the services of a vendor to provide technical support to a program office for use in accomplishing its mission.

These guidelines indicate that the “principal purpose” of the transaction should determine whether a transaction should be a procurement contract, a cooperative agreement, or a grant. However, these guidelines allow significant discretion in defining the principal purpose, which the Department should exercise when analyzing privatization options. In particular, the Department should examine the distinguishing features of the award process and the content of each contract vehicle when considering privatization initiatives. For example, the Competition in Contracting Act applies to procurement contracts but not to cooperative agreements and grants. There are standard provisions set out in the Federal Acquisition Regulation (FAR) and the Department of Energy Acquisition Regulation (DEAR) for acquisitions, and in the Financial Assistance Rules for grants and cooperative agreements.

As discussed in the previous section, competition requirements can hinder projects that attempt to use contracting out as a transition phase to full divestiture. If such a project can be defined as a cooperative agreement, for example, the Competition in Contracting Act requirements do not apply and the Department may be able to utilize this flexibility to structure an effective transition to functional divestiture.

Economic value is created when market exchange confers benefit to both the buyer and seller, and exchanges occur only when mutual benefits exist. The terms and conditions of the contract between the buyer and seller determine the degree of mutual benefit by allocating risk and reward. These maxims apply to government privatization initiatives. If the contract shifts too much risk to the private sector—especially financial risk that can increase the cost of attracting investment—costs can increase to the extent that either the privatization would not save money for the Government or private sector interest in the procurements may be eroded. If, on the other hand, the Government does not shift enough risk to the private sector, a contract can limit the ability to minimize costs.

The Department must establish realistic, well-defined, and equitable allocations of the financial risks in each privatization project. An equitable allocation of risks requires that both parties to the transaction be familiar with the marketplace and fully appreciate the proposed scope of work. A careful balancing of these factors will result in the protection of the Government’s interests, broad participation by qualified contractors, and reliance on the expertise of the private sector in accordance with best commercial practices.

The allocation of financial risk is especially important in converting from government provision of capital-intensive products or traditional cost-plus M&O contracts to fixed-price contracts with the private sector. In addition, because of the unique and highly complex missions of DOE, many programs that are good candidates for privatization are monopsonies (only one buyer) that are unattractive to vendors whoconsider this arrangement a “captured” industry. This introduces added risk and makes obtaining contract financing more difficult.

Traditional corporate (full) recourse financing may be available for some of the Department’s privatization activities. However, given the fact that many of the contracting-out opportunities will involve large-scale facilities, single-purpose/single-payment streams, and the interest of the developer in diversifying risk, project (limited or nonrecourse) financing will likely be the preferred approach pursued by contractors for these opportunities.

Much of the capital required by the private sector to finance privatized projects may be raised from debt financing. For privatization to succeed in these situations, DOE must ensure that such projects are attractive to the financial community. The Committee for Environmental Management’s October 1995 report, Report on Privatization to DOE’s Environmental Management Program, reported that financiers say that they need the following:

Mitigation of these issues would result in a substantial reduction of contract and performance risk. The availability of debt financing and the interest rate charged for that debt is primarily a function of how those risks are allocated. If risk allocated to the private sector is judged too high, or if the risks are considered uncontrollable, private financing will not be available at all. This is particularly true for the type of project financing required for several of DOE’s projected waste-treatment programs that have limited commercial application. To the extent that some of these projects are first-time applications of specific, complex technologies, the financial community is not anxious to participate without recognition that some program risks must be mitigated by the Government.

It is also recognized that other sources of capital are available to the Department. Government financing may be an alternative in some privatized initiatives or for some phases of the initiative. Other approaches that may be considered are the use of government guarantees, advanced purchases, or related hybrid approaches. In many cases, the Department needs to understand which risks in a given project or initiative are not acceptable to the private sector and then determine whether (1) the Government is better positioned to mitigate those risks and (2) it is appropriate for the Government to accept those risks. Each of these alternatives needs to be weighted and carefully considered before determining the best business approach to be pursued.

In addition, contractors cite the likelihood of changes in laws or regulations during an extended period of contract performance, which also introduces uncertainties and associated performance risk. This may substantially affect a contractor’s ability to make a return on investment commensurate with the risk assumed by the company at contract award.

Contract length can provide the financial community with some certainty regarding the stream of payments used to service and retire debt. While most privatization efforts require long-term commitments by the Department in order to be successful, the Government’s ability to provide such a commitment is hampered by the following limitations:

• Absent a waiver from the Department of Labor, contracts subject to the Service Contract Act may not be for a term longer than 5 years.

• Pursuant to the Antideficiency Act, appropriated funds must be obligated at the time of contract award to cover contract costs.

The Federal Acquisition Regulation (Subpart 49.5) prescribes the termination for convenience clauses that are required for various types of contracts. These clauses provide the Government with the unilateral right to terminate a contract, at any time, when the contracting officer determines that it is in the Government’s interest. These clauses also predetermine the allowability of certain costs and the procedures for handling disputes, to simplify the termination process. Specifically, cost allowability is subject to the Government’s cost principles, which make interest and some financing charges unallowable. The cost principles do allow for the recovery of some financing charges, such as facilities’ capital cost of money, but at the applicable Treasury rate, which is usually much lower than the prime rate.

The standard government contract clause, “Termination for Convenience” (T for C) reflects the traditional relationship between the Government and private contractors, but may require adjustment for privatizations. Industry representatives believe that the Government’s use of the T for C clause can impede participation in privatization efforts, particularly with respect to securing financing for capital-intensive projects. Industry cites two major problems with the T for C clause in privatizations that involve third-party financing: (1) the high risk of the Government terminating a contract prior to completion and (2) the unallowability of interest charges and the limitation on the amount of recoverable profit. These risks can drive up the cost of obtaining financing and in some cases even cut off the prospects of obtaining financing.

The T for C clause provides DOE with important rights. In its sovereign capacity, the Government needs the flexibility to react to the Nation’s needs in a constantly changing environment. Thus, the Government is able to use its unilateral right to cancel projects due to, for example, inadequate funding, change of direction from Congress, or reallocation of limited financial resources. The T for C clause has notimpaired private-sector participation in most traditional fixed-price contracts because the Government provides progress payments to the contractor during the course of the work, thus ensuring an adequate cash flow and limiting the need for private financing. In return, the Government takes delivery of the goods or services in the event of a termination.

While recognizing the importance of the T for C concept to the Government in its sovereign capacity, this concern needs to be carefully and appropriately balanced with the needs and expectations of contractors and financiers that they will receive appropriate compensation and a reasonable rate of return.

A number of the privatization projects currently under consideration call for the private vendor to finance, construct, own, and operate the facility or project. In these initiatives, the Department seeks to use fixed-price contracts for services while making limited or no progress payments during the construction phase of the project. Under these plans, large upfront costs will not be recovered by the vendor until the delivery of services. Thus, contractors could be at substantial risk if a project is terminated by the Government prior to full recovery of the private investment. A decision to contract with the Government under such terms would engage companies’ resources, including financing arrangements, for a considerable period of time. Thus, unless the needs of private industry and the Government are carefully balanced, contractors and financiers would be hesitant to devote necessary resources for government projects.

In addition, securing financing often entails significant costs that are unallowable under the traditional T for C clause and therefore not recoverable in the event of a termination. Contractors specifically cite the expectations of their financiers for a return on investment commensurate with the risks inherent in project financing. Those costs, as well as the opportunity costs a contractor may have foregone while pursuing government business, may exceed the amount of profit considered allowable under the T for C clause. Thus, without proper balancing, the clause may make financing difficult or very costly to obtain and may impair a contractor’s ability to pursue a privatization project.

One approach used to successfully address these important concerns of the vendor has been to include contract language that states that the Government intends to obligate sufficient funds to meet or exceed any annual termination liability and incurred performance payment requirements. Further, where private financing is a critical element, the clause could, in an approved deviation from the FAR, provide that allowable costs will include the financing cost and any legal, underwriter, third-party credit support, and other professional fees directly related to obtaining the financing. Such costs must be reasonable and allocable. Of course, the Government’s entire obligation under the T for C clause would be contingent upon the availability of appropriated funds from which payment for contract purposes can be made. Under certain circumstances, it may be appropriate to negotiate a ceiling on termination costs prior to contract award (see Recommendation 5). DOE should also explore other alternatives that can provide the necessary balance between government and private-sector needs and requirements.

In addition to the foregoing, other terms and conditions that need to be considered in a privatization initiative include the following:

• Performance expectation levels must be clear, including product acceptance criteria, “cleanup” requirements, if any, and interactions with other Government contractors.

• Appropriate use of applicable indemnities, such as Price-Anderson, or pre-existing conditions.

• Protection of the contractor against government nonperformance through such concepts as “idle facility” or “idle capacity” charges.

• Inclusion of some protection of the contractor against circumstances beyond its control (for example, a change in law) and for which insurance is unavailable or prohibitively expensive. Privatization transactions in the Department often involve the creation of specialized facilities constructed and operated for a single customer to perform a single task under a long-term arrangement that provides for the payment of firm fixed prices upon the delivery of a service or product. The special nature of this contractual relationship imposes restrictions on the privatization contractor that normal businesses serving the broad marketplace do not face. These restrictions become particularly apparent when the contractor is faced with circumstances outside its control that have the potential to increase the time required for or the cost of performing the work.

• The possibility of the Government providing credit assurances in order to drive down the cost of financing the project.

Privatization contemplates a new type of contracting with more risk for performance and the development of new technology being assumed by the contractor. Questions about intellectual property rights unique to privatized contracts will need to be addressed. For example—

• After termination of the contract, will the Government need rights in intellectual property in order to continue the privatized activity?

• Will the Government need to maximize competition in future similar activities or is the Government prepared to give the privatization contractor a competitive advantage in future contracts by limiting Government rights in technical data used in performing the privatized activity?

• Does the Government desire assurances that the technology will be available for use at other sites or on other projects outside of the initial site for the privatized activity?

• Will any public-interest groups need access to technical data about a privatized activity to be assured that environmental and safety concerns have been addressed?

• Will contractors be reluctant to share their commercial technology with the Government for fear of losing the protection of the results of their prior investment or of losing their competitive advantage in obtaining future Government contracts?

Some privatization projects will require that the contractor demonstrate that its proprietary technology works. If the technology demonstrated has not actually been reduced to practice, the demonstration will bring into play patent statutes requiring that DOE obtain rights in newly demonstrated technology. For example, DOE may be required by law to obtain a government-purpose license to allow the Government to use the demonstrated technology at other sites.

When activities previously performed either by DOE M&O contractors or by government employees are converted to non-M&O prime contracts or subcontracts, one of the key questions is to what degree the government will transfer liability risks to the private contractors. If the Government transfers full liability for all risks to a contractor, the associated insurance costs will likely lead to increased product or service prices. Alternatively, the Government may enter into an agreement to reimburse the contractor for costs incurred for damages or injuries to third parties. The Government may also opt for a combination of both contractor-procured insurance and government cost reimbursement.

Cost reimbursement can affect both contract cost and performance. The Department must weigh the potential for cost savings from cost reimbursement (reduced insurance costs, and so forth) against the potential cost to the taxpayer for the risks associated with potential claims coverable under cost reimbursement. Cost reimbursement may also have a negative effect on contractor performance by removing the incentive of financial responsibility for careless actions. In practice, the Department often has sought to blend a transfer of risk to the contractor with a partial cost reimbursement of contractor liability in order to balance risk and cost. For example, in the Notice of Proposed Rulemaking (NOPR) to implement certain contract reform initiatives published in the Federal Register on June 24, 1996, the Department proposed the shifting of certain risks to M&O contractors. Specifically, the NOPR proposes, among other things, that liabilities and costs to third parties arising from contract performance are presumed to be unallowable unless the contractor can demonstrate that such costs did not result fromwillful misconduct or lack of good faith on the part of the contractor’s managerial personnel or the failure of the contractor’s managerial personnel to exercise prudent business judgment. After receipt and consideration of public comment, the Department plans to finalize the rule.

When the Government contracts out activities or services previously performed by government employees or M&O contractors, the action raises a number of transition issues. The most important of these center around labor and management, occupational safety and health, environmental, communications and procurement integrity, constraints on disclosure, and unsolicited proposals.

DOE recognizes the need to minimize the impact of privatization on affected employees, the community, and the operation of DOE sites. DOE will promote open, forthright, two-way communications with potentially affected employees, union representatives, and community leaders to develop options for dealing with the impact. The Department’s Office of Worker and Community Transition, as the designated point of contact for labor-policy issues, will work with DOE field organizations to coordinate the Department’s efforts to respond to issues related to privatization.

The primary objectives of contract reform, including contracting out, are to improve performance and reduce costs at DOE facilities. The “tools” available for achieving these objectives include fixed-price contracts, adopting best-in-class commercial practices, use of “work smart” standards for safety and health, reengineering work practices, and privatization, among others. The appropriate use of these tools at DOE facilities is necessary to adapt to changing missions and shrinking resources.

In establishing reengineering and privatization programs, DOE has a significant interest in the human-resources management practices of its current prime contractors as well as the human-resources policies of subcontractors or new contract awardees that result from privatization efforts. DOE prime contractors employ more than 120,000 people, and human-resources costs represent the bulk of the expenses associated with these contracts. A work environment that achieves the proper balance of employee responsibility, employment stability, and attention to cost should result in higher quality and productivity.

DOE managers should encourage contractors to consider the following, where appropriate:

• Productivity improvement programs and make-or-buy analyses may help identify opportunities for improving performance and reducing costs. Make-or-buy analyses should involve employees from the beginning and be independently verifiable. For example, creation of onsite labor-management committees to provide a forum for dialogue and consultation on these programs may often be appropriate.

• Work-force restructuring should be accomplished in a manner that, to the maximum extent practical, mitigates the social and economic impacts on current employees and their communities. With respect to eligible employees of a defense nuclear facility, employees displaced by workforce restructuring shall be provided a preference in new hiring consistent with section 3161 of the National Defense Authorization Act for fiscal year 1993. Section 3161 mitigates the effects of post-Cold War downsizing at Federal facilities.²

• When work is contracted out, contractors shall comply with all applicable labor laws and regulations, including union recognition and successorship where appropriate. The major statutes that govern labor standards include the Davis-Bacon Act, the Copeland Anti-Kickback Act, the Walsh-Healey Public Contracts Act, the McNamara-O’Hara Services Contract Act, and the Contract Work Hours and Safety Standards Act. Successorship issues should be decided in accordance with the established rules developed under the National Labor Relations Act (NLRA) (see the outline of legal issues at end of this chapter).

The Atomic Energy Act of 1954, together with the Occupational Safety and Health Act of 1970, vest DOE with the authority to regulate occupational safety and health at its facilities. In cases where the work being contracted out is to be conducted on federally owned or leased land that is used by the private contractor, DOE requirements must be applied to the contractor until such time that the Federal Occupational Safety and Health Administration (OSHA) or an authorized State assumes regulatory authority. The major difference between DOE requirements and OSHA’s standards is that DOE requires contractors to establish and implement a formal worker-protection management program.

Privatization of DOE facilities or activities may result in the transfer of regulatory oversight from DOE to OSHA or an OSHA-authorized State. Because of the requirement to notify external regulators, particularly OSHA, early in a privatization effort, close coordination between the Department’s headquarters and field offices is vital. Where issues arise regarding regulatory jurisdiction, the Department must be prepared to maintain an ongoing role in environmental, safety, and health oversight to ensure the continuity of protection until external regulation is in place.

Before OSHA can assume jurisdiction of a privatized facility, regulatory authority must be transferred from DOE to OSHA in a clear and definitive way, and DOE and OSHA must provide public notice in the Federal Register that regulatory authority is being transferred. The vehicle used to transfer authority is an addendum to the Memorandum of Understanding (MOU) entered into between DOE and OSHA in 1992, which delineates their respective regulatory authorities. The DOE Office of Worker Health and Safety, in conjunction with OSHA, has developed a process to modify the MOU and develop the Federal Register notice, and must be involved early in privatization initiatives.

As learned at Savannah River (see the case study on page 5–24), the Federal or State OSHA may not immediately assume jurisdiction for a variety of reasons. In the Savannah River case, the transfer of regulatory jurisdiction was delayed as a result of questions regarding how the Government obtained the land and whether or not the operation was truly a private enterprise. And, as DOE learned during the privatization of the Portsmouth, Ohio, and Paducah, Kentucky, gaseous diffusion plants, DOE is liable for correcting significant OSHA-based noncompliances identified prior to the transition.

OSHA has been concerned that the pace and scope of DOE privatizations will strain the agency’s limited resources. As a result, DOE and OSHA have formed an ad hoc working group to review interagency issues surrounding privatization. Current negotiations are focused on the transfer of jurisdiction for recently privatized facilities. In addition, the National Academy of Public Administration (NAPA), under a DOE grant, is analyzing privatization as it considers the broader issue of DOE transition to external regulation. NAPA expects to publish its report in January 1997. Both efforts will identify resource impacts and the legal and jurisdictional issues associated with privatization and external regulation and will seek to facilitate a smooth transition to external regulation (see Recommendation 8).

The regulatory transition for nuclear safety is more problematic than for environment, safety, and health. Under the Atomic Energy Act, DOE currently self-regulates nuclear safety and, with a few exceptions, its activities and those of its prime contractors are excluded from the jurisdiction of the Nuclear Regulatory Commission (NRC). However, increasing awareness of public health and safety issues pertaining to aging DOE nuclear facilities led Congress to create the Defense Nuclear Facilities Safety Board (DNFSB) in 1988. The DNFSB is responsible for independent oversight of all activities relating to nuclear safety within DOE’s nuclear weapons complex. The DNFSB reviews and analyzes facility and system design, operations, practices, and events and makes recommendations to the Secretary necessary to ensure adequate protection of public health and safety.

Facilities currently adhere to the DOE-approved authorization bases, which establishes a facility’s authority to operate, as well as additional requirements in DOE rules, orders, and standards. DOE has enforcement authority for all rule-based requirements and has contractual authority to enforce DOE Orders incorporated into its contracts.

The December 1995 report of the Advisory Committee on External Regulation of Department of Energy Nuclear Safety, Improving Regulation of Safety at DOE Nuclear Facilities, recommended that the Department move toward external regulation of nuclear safety. In response to that report, Secretary O’Leary created the DOE Working Group on External Regulation which was charged with providing recommendations for implementing the Advisory Committee’s findings and recommendations. In its December 1996 report, the Working Group narrowed eight implementation options down to two. The option chosen by the Secretary established the NRC as the regulator of DOE nuclear facilities over a 10year period and phases out the DNFSB, with its remaining staff merging with NRC in the last phase. Transition would take place immediately after enabling legislation is passed.

It is likely that DOE will continue to exercise approval authority over the facility’s authorization bases because, as owner of the facilities, DOE would retain some obligation to maintain nuclear safety. DOE will likely act in its capacity as owner in interagency relations with the regulators. Contractual mechanisms will be the primary mechanism for DOE to maintain at least limited control over safety at privately owned facilities dedicated to DOE work.

When considering a particular privatization involving nuclear materials, DOE must conduct a careful analysis of the impact of the transition to NRC jurisdiction. DOE is not currently organized to regulate privatized operations. Consequently, as was the case with the Hanford Tank Waste Remediation System, privatization may require DOE to establish entirely new regulatory units, requiring additional personnel, increased funding, and substantial startup time. In addition, differences between DOE and NRC requirements could affect fundamental decisions regarding site selection and facility features and could significantly affect the cost and schedule of the privatization. For example, the transition to NRC regulation of the gaseous diffusion plants in connection with privatization of the Department’s former enrichment enterprise could cost DOE more than $100 million to bring the plants into compliance with NRC requirements.

While legislation is needed to attain external regulation of most DOE nuclear facilities and activities, the Department is working with the NRC and the DNFSB to hasten the transition. As with external regulation of occupational safety and health, there are steps that must be completed before nuclear safety can be externally regulated at a DOE-owned or -leased site. First, assuming the proposed external regulator has the requisite legal authority, DOE and the regulator should notify the public of the transfer of regulatory jurisdiction over the facility, perhaps by publishing a notice in the Federal Register. Second, if gaps existing in its current regulation, the regulator must establish new regulations and standards that address the DOE activity. Also, as recognized by the Advisory Committee on External Regulation of DOE Nuclear Safety, there must be coordination during any transition period to avoid gaps or conflicts in nuclear safety requirements. Finally, there must be an adequate transition period to accomplish the transfer of jurisdiction.

In addition, DOE must still maintain a strong internal safety management system. This safety management system would establish “corporate policy,” provide an interface with the regulators, and control risks.

The transfer of jurisdiction in the environmental area does not involve the same regulatory changes required for occupational safety and health or nuclear safety because DOE does not self-regulate environmental compliance (except for standards for radiation protection of the public health and environment). Nevertheless, privatization requires careful analysis and allocation of environmental responsibilities. The Environmental Protection Agency (EPA) and State and local agencies are responsible for enforcement. In general, a lease or other contract document would outline how to transfer and allocate responsibility for environmental regulation. For example, DOE transferred the Paducah and Portsmouth gaseous diffusion plants to a government-owned corporation. DOE retained responsibility for the conditions that existed at the time of the transfer, and it retained manager and co-operator status for certainstorage facilities. DOE negotiated the lease of specific facilities and prepared MOUs to define roles and responsibilities under the lease.

Consistent with Federal policy and law, DOE policy provides for open communications at every phase of the Department’s acquisitions, from market research through contract performance. The Department encourages employees to disclose the maximum authorized information about Departmental needs to industry during the acquisition process. To ensure fair and equal access to information, it is also the Department’s policy to ensure consistency in the information provided to companies and to demonstrate balance and lack of bias in dealings with the private sector. However, statutes such as the Procurement Integrity Act and other regulations restrict certain types of disclosure during this process.

Once the Department has developed its acquisition strategy for a given requirement, it maintains as much communication as is legally permitted during the acquisition process. During the presolicitation phase of the acquisition, the Department may issue a request for information to identify potential sources and to clarify the Department’s needs as well as the private sector’s ability to meet programmatic requirements. In addition, the Department often releases draft statements of work or draft solicitations for review. This process enables companies to provide information, insight, and comments to help the Department refine its business approach. Conferences to discuss subcontracting opportunities, sometimes held in conjunction with presolicitation conferences, also help facilitate communication among all parties. After release of a solicitation, communications become considerably more structured and formal, but the goal of promoting understanding and clarity remains.

The Department’s policy of maximum information exchange consistent with law and regulation is applicable to its attempts to increase privatization. Persons who communicate with industry need to be careful to avoid any disclosures that confer an advantage on one or more potential competitors. In addition, the Department is prohibited from disclosing certain types of information, such as the following:

• Proprietary information, trade secrets, and confidential commercial or financial information

• Source selection plans, technical evaluation plans, and other source-selection information

• Information obtained from prospective offerors and others to prepare government estimates

The Department of Energy frequently receives unsolicited proposals from offerors who hope to obtain contract or assistance awards. In most cases, unsolicited proposals are submitted to the Unsolicited Proposals Coordinator in the Office of Clearance and Support of the Office of the Deputy Assistant Secretary for Procurement and Assistance Management. Upon receipt, the coordinator does a preliminary review to determine if the proposal qualifies as an unsolicited proposal. Proposals will be rejected if there is a lack of programmatic interest; they fail to demonstrate a unique or innovative method, approach, or idea; there is a lack of funds for support; or the proposal substantially duplicates known or recent research of a current or planned solicitation. The final determination as to the acceptability of an unsolicited proposal is made by the relevant program office.

In the context of privatization, firms may be reluctant to submit unsolicited proposals that provide what they believe to be proprietary or unique solutions to Departmental problems if they believe the Department may take their solutions and use them in a competitive solicitation. To avoid this problem, the Department must safeguard the proprietary data submitted and follow the FAR and DOE Orders governing unsolicited proposals.

The Department is currently reviewing its handling of unsolicited proposals. Program office responses are being tracked to identify major roadblocks in the review and approval process and the order governing unsolicited proposals is being rewritten to incorporate changes to ensure that submitters get a more timely response from the Department.

Privatization efforts require new approaches in many areas, such as financing, risk allocation, and contractual clauses. In the area of contract administration and management, new techniques, procedures and practices may have to be developed to ensure the success of the privatization effort. This is especially true if the contractual arrangement becomes a fixed-price mechanism as opposed to a cost-type mechanism. Fixed-price contracts are fundamentally different than cost-type contracts and require different management approaches from both government and contractor personnel. For example, a fixed-price contract requires a much more precise statement of work and more highly specified terms and conditions than typically are needed for a cost-based contract. Greater specificity allows the contractor to more realistically estimate its costs before award, but requires the Government to more explicitly state its requirements upfront and also requires more indepth analysis of contractors’ estimated prices. Because DOE traditionally has relied on cost-reimbursable contracts, some contracting officials may lack experience in analyzing alternative cost scenarios or defining their requirements.

To the extent that privatization results in a DOE prime contractor competitively subcontracting requirements that it formerly provided, the impact to DOE on contract administration and management should be negligible. To the extent that privatization results in new prime contracts for work that was previously accomplished by M&O contractors, the contract administration and management duties of DOE employees may increase and may require a different skill mix than currently exists. With the ongoing streamlining initiatives, many experienced procurement personnel have left the Department, leaving potential gaps in Departmental resources. The Department must take steps to ensure that sufficient contract management personnel are available to administer its fixed-price contracts effectively (see Recommendation 4).

Under cost-type contracts, which are the most common arrangements at DOE, contractors are reimbursed for their costs related to contract expenditures. Because of the size of its M&O contracts and the administrative burden in processing monthly invoices, DOE has relied heavily on the use of advance payments using a letter of credit for its M&O contractors. This allows a contractor to draw money down in advance for its operating expenses each month. This method is the least risky method for a contractor and requires no contractor financing.

The traditional approach used throughout the Government is fixed-price type contracts. This mechanism provides the maximum incentive for a contractor to begin providing services or delivering goods quickly in order to recover capital investments as early as possible, recognizing that profits are highly dependent on early and successful completion. In this approach, private contractors would provide any needed infrastructure for contract performance—including building any needed facilities—with their own financial resources and recover their costs based on the fixed-price for goods or services. In moving toward more fixed-price contractual mechanisms, DOE understands that other management techniques and requirements will be necessary to award and administer fixed-price contracts.

Applicability of the Truth in Negotiations Act and Cost Accounting Standards Provisions

When the Government contracts out for goods and services, a number of accounting and regulatory requirements must be factored into the contract. For example, under the Truth In Negotiations Act (TINA), offerors may be required to submit certified cost or pricing data for procurements exceeding the $0.5 million threshold unless an exception to the data submission requirements applies. Under the exceptions, certified cost or pricing data will not be required for the acquisition of a commercial item or in cases where the price agreed upon is based on adequate price competition or set by law or regulation. If a contractor provides certified cost or pricing data found to be inaccurate, incomplete, or out-of-date, the Government is entitled to a price adjustment, including profit or fee, for any significant amount by which the contractprice was increased because of the defective data. In addition to the price adjustment amount, the Government is entitled to interest on any overpayments and penalty amounts on certain of these overpayments.

FAR Part 31 (Cost Principles) specifies what costs are allowable under a government contract. Many costs that are considered routine business expenses (such as advertising, interest charges, and so forth) are not allowable contract costs. Further, the Cost Accounting Standards (CAS) apply to certain government contracts and require the use of specified accounting practices when accounting for costs incurred on government contracts. These standards differ from the generally accepted accounting principles to which most commercial entities adhere and may require firms to establish distinct accounting systems unique to the government contract work.

The provisions of TINA and CAS have no commercial counterpart and are often viewed by industry as unduly burdensome. Additionally, the effective application of these unique government contract requirements also require government oversight and tend to increase a contractor’s cost in providing the desired goods and services. Thus, the costs of complying with these requirements may make a particular privatization initiative unattractive.

Further, to the extent that the Department is seeking to encourage private companies to assume greater risks in government contracting, the burden of complying with the unique Federal accounting requirements may discourage some businesses that have not already established a Federal contracting unit.

The following charts represent the key legal authorities governing the contracting out for goods and/or services by the Department of Energy. They should not, however, be construed as a comprehensive listing of all legal authorities that may be applicable to a particular privatization activity.

¹ The Cost Issues section of the Make-or-Buy Decision Tree refers to a cost/benefit analysis matrix that is still in development. It will be issued by the Department at a later date.

²Section 3161 provides specific objectives to minimize worker and community impacts, including, where practical, a hiring preference to displaced workers. Additionally, in situations where positions become available through a contracting-out or follow-on contract, the current employees should first be offered their same or a similar job with the replacement contractor to avoid a layoff. The Department’s criteria for determining eligibility for the hiring preference is found in the Interim Planning Guidance for Contractor Workforce Restructuring. Copies of this guidance may be obtained from the Department’s Office of Worker and Community Transition.

Case Study 4: Hanford Utilities Privatization Project

Background

The Cold War placed many national security requirements on the operations at DOE’s field sites. One of those requirements at the Hanford facility in Washington State was the need for a continual, uninterrupted and dedicated power supply. With the end of the Cold War and with the acquisition of new missions, the Richland Operations Office (RL) began to investigate and evaluate different ways to restructure Hanford operations.

In early 1995, in an effort to reduce costs, RL decided to evaluate possible areas for privatization. The manager of RL notified the local governments of intentions to pursue direct agreements with those local governments for infrastructure and support service functions if cost/benefit analyses indicated that it would be economically advantageous to RL.

RL met with the onsite contractor and the labor union to discuss RL’s intention of investigating privatization. The union was informed that it would have a chance to keep the work if onsite costs were reduced.

The Effort

RL developed a formal process for evaluating potential privatization projects. Both the local government and the labor unions were fully briefed on the process, which, among other things, provided that the onsite contractor would have a fair chance to compete for the work.

RL worked with the City of Richland to identify the scope of work that the city would be interested in taking over. The City of Richland expressed strong interest in providing utilities (electrical, water, and sewer) to the Hanford 300 Area. RL provided the onsite contractor and the City of Richland with the same statement of work and asked for a price on services. RL formally requested the onsite contractor to involve the labor unions in preparing the proposal.

RL received a technical and cost proposal for providing utilities to the Hanford 300 Area from both the onsite contractor and the City of Richland. RL performed a cost-comparison analysis of both proposals, taking into consideration transition costs that would be incurred as a result of transitioning the 300 area utilities to the City of Richland. The cost-comparison analysis indicated that the city’s proposal would not yield savings to RL.

Lessons Learned

In this case, the onsite M&O contractor recognized that a significant cost element of supplying electricity was the cost of labor. To be competitive, the onsite contractor had to reengineer its business practices and reduce staffing levels. These efforts allowed the onsite contractor and workforce to underbid the City of Richland’s proposal and retain the work.

This case demonstrates that the potential of contracting out work is an effective incentive for an M&O contractor to identify ways to reduce costs. As this case demonstrates, the primary objective is to determine the most economic, productive method of performance—not simply to contract out.

Case Study 5: Privatization of Inhalation Toxicology Research Institute

Background

The Department of Energy’s Inhalation Toxicology Research Institute (ITRI) is a government-owned, contractor-operatedresearch facility located at Kirtland Air Force Base in Albuquerque, New Mexico. ITRI’s mission as a management and operating (M&O) contract was to identify and describe the health effects associated with energy-related materials released in the workplace or general environment, with the emphasis on inhaled materials. ITRI has been operated since 1960 by the Lovelace Biomedical and Environmental Research Institute (LBERI) and its parent organization, the Lovelace Institutes. LBERI is a nonprofit organization established for the purpose of performing medical research. The current contract expired on September 30, 1996.

The Effort

In recent years, flat budgets and increasing administrative costs have caused DOE’s direct research budget to decline. To maintain the viability of this valuable national resource, DOE considered alternative contracting methods for operating the facility. The alternative chosen is to lease the ITRI facility to Lovelace, thus allowing Lovelace to utilize the facility for non-DOE work. Under this concept, DOE will support needed research requirements from the facility through cooperative agreements. The M&O status of the contract and the designation of ITRI as a federally Funded Research and Development Center have been eliminated.

Current Status

DOE negotiated lease arrangements with the Air Force and Lovelace. At the same time, DOE worked with Lovelace to develop a cooperative agreement that benefits both parties. The formal announcement of the privatization was made on October 1, 1996.

Lessons Learned

Numerous alternative business approaches were evaluated before focusing on this arrangement. Both DOE and the contractor were frustrated by the lack of flexibility inherent in the M&O contract. To overcome this obstacle, both parties needed a common vision for “doing business” and defining the essential roles and responsibilities for achieving that vision. The key was having both parties recognize that evolving mission requirements and declining budgets necessitated a new business arrangement in which future DOE funding would be limited to supporting research services.

While Lovelace assumes greater business risk, it also has the opportunity to market business to private clients. It currently has more than 30 active proposals under consideration for a total value in excess of $25 million. A competitive award for approximately $5 million from another Federal agency is pending.

Case Study 6: Privatization of Hanford Tank Waste Remediation System

Background

Radioactive waste has been stored in large underground storage tanks at the Hanford Site in Washington State since 1944. Approximately 56 million gallons of waste containing approximately 240,000 metric tons of processed chemicals and 177 mega-curies of radionuclides are currently being stored in 177 tanks. These caustic wastes are in the form of liquids, slurries, saltcakes, and sludge. In 1991, the Tank Waste Remediation System (TWRS) program was established to manage, retrieve, treat, immobilize, and dispose of these wastes in a safe, environmentally sound, and cost- effective manner.

Construction of the double-shell underground storage tanks at the Hanford Site began in 1977. Each tank has a capacity of 1 million gallons of high-level liquid radioactive waste.

The TWRS contracting strategy traditionally has involved government-owned, contractor-operated (GOCO) facilities under a cost plus award-fee contract. Under its privatization strategy, DOE plans to change its contracting approach to purchase services from contractor-financed, contractor-owned, contractor-operated (that is, privatized) facilities under fixed-price contracts.

Effort

At the start of the TWRS privatization initiative, DOE’s Office of Environmental Management performed a series of studies to determine the feasibility of privatization. Feasibility was reviewed with respect to the services that could best be provided, the scale of the services, the timing of the services, and the regulatory framework for the services. This required an evaluation of various issues, including: (1) the TWRS activities that could best be performed on a privatized basis, (2) the contracting approach that should be employed (for example, how many phases and contracts should be awarded), (3) the desired product types and the acceptance specifications for each product type, (4) the level of risk that should be assumed by the Government and the contractors, and (5) the costs that should be incurred by the contractors and the price that should be charged to DOE.

Photographs taken in 1978 shows the nearly completed tank farm. The concrete-reinforced vessels have two carbon steel shells, and the space between the shells is monitored for leakage.

Various TWRS activities were separately reviewed as candidates for privatization. These reviews looked at the storage, characterization, retrieval, treatment, and immobilization of waste. Treatment and immobilization services were determined to be most suitable for privatization because they could be defined with sufficient precision to be subject to a fixed-price procurement. In addition, treatment technology of similar complexity and scale to the first phase of the TWRS privatization had been demonstrated commercially at various locations, including production facilities in Great Britain and France.

Once it was determined that there was a service that industry could perform on a privatized basis, DOE sought to determine the best approach to procure the service. DOE determined that a phased implementation approach would ensure the greatest likelihood of success because this approach would allow the Department to reduce various financial, technical, and regulatory uncertainties before it commits itself to various subsequent stages of the privatizationeffort.

In order to purchase the waste treatment and immobilization services, DOE had to establish requirements for both the primary and secondary process products and identify those services that the contractor should provide to DOE. DOE developed specifications for the primary products (immobilized low-activity and high-activity waste) and the secondary process products (cesium and other radionuclides). The contractors will be responsible for the disposal of products that do not meet the required specifications. Without such precise specifications, it is possible that a contractor could provide an unacceptable service incompatible with DOE requirements.

This 1978 view of the nearly completed tank farm at Hanford shows the mass backfill operation

Under the TWRS privatization, DOE also will change its traditional approach of assuming all risk for waste remediation. Instead, DOE will provide a cost-effective balancing of risks between the Government and the contractor. For example, the private contractor will be responsible for performance risk (for example, producing immobilized waste that meets DOE specifications). In comparison, under the traditional cost plus award-fee contract, payment is made as work is performed, whether or not the waste is treated to produce acceptable waste forms.

To develop an estimate of the cost of privatization, DOE prepared a financial model. This model takes a capital cost estimate (design, construction, permitting, operation, and deactivation) and estimates “private industry” costs (profit, taxes, return on equity, interest). By adding the “private industry” costs, it is possible to develop a more realistic estimate of the price DOE will pay.

Currently, two phases of TWRS privatization are envisioned: Phase I, a proof-of-concept and commercial demonstration phase; and Phase II, a full-scale production phase.

Phase I has the following objectives:

• Demonstrate the technical and business viability of using privatized facilities to treat Hanford tank waste

• Define and maintain required levels of radiological, nuclear, process, and occupational safety

• Maintain environmental protection and compliance

• Substantially reduce the life-cycle costs and time required to treat Hanford tank waste.

Phase I consists of two parts. Part A is a 20-month period to establish the technical, operational, regulatory, business, and financial elements required by privatized facilities that will provide tank waste treatment services on a fixed-unit-price basis. Based on Part A performance, one or more of the contractors who successfully perform Part A will be authorized to perform waste-treatment services for DOE in Part B. Part B is a period of 10 to 14 years during which the authorized contractor(s) will finance, design, construct, operate, and deactivate the waste-treatment facilities. During Part B, fixed unit prices will be paid only for completion and acceptance of waste-treatment services meeting contract specifications. Part B has a potential value exceeding $5 billion.

If Phase I efforts are successful, DOE plans a second competitive procurement for Phase II activities. Phase II would be the full-scale production phase, and it is currently expected to begin in 2004. The current Phase II plan involves two competitively selected fixed-price contractors who will finance, design, construct, operate, and deactivate waste-treatment facilities. The objectives of Phase II include implementing the lessons learned from Phase I, processing all tank waste into forms suitable for final disposal, and meeting or exceeding regulatory performance milestones.

Current Status

In November, 1995, DOE issued for public comment a draft request for proposal (RFP) for Phase I of the privatization effort. Comments from vendors and other interested parties were received, and DOE issued the final RFP in February 1996. The RFP incorporated numerous suggestions from the public comments. It contemplated at least two awards to take advantage of alternate technical approaches and to foster competition in both cost and technology.

In the spring of 1996, two contractor teams submitted proposals. Each of the offerors satisfied the qualification criterion set forth in the RFP and provided a basis for negotiations. Negotiations with the contractor teams began in mid-1996. In September 1996, awards were made to each of the contractor teams that had submitted proposals.

In preparation for contract award, DOE established an in-house organization responsible for the regulation of the radiological, nuclear, and process safety of the contractor’s facilities in Phase I. In Phase II, it is planned that the Nuclear Regulatory Commission will assume responsibility for regulating radiological and nuclear safety. The Occupational Safety and Health Administration will regulate occupational safety and health in both phases. In addition, DOE will continue to maintain overall accountability for safety and health matters throughout the privatization effort.

With the TWRS privatization strategy, the Department is embarking on the most complex and most expensive environmental management project in the Nation’s history. The strategy is characterized by the following:

• Technical challenges—for example, in retrieval, immobilization, storage, and disposal

• Private-sector challenges and demands

• Stakeholder challenges and demands

• Political challenges exacerbated by the high cost and long duration of the project.

Lessons Learned to Date

Draft RFP. The technique of issuing a draft RFP was invaluable both in signaling to industry DOE’s privatization intent and in obtaining the views of the stakeholders and potential offerors prior to finalizing the procurement approach.

Qualified Source Evaluation Team. Many complex issues must be understood before privatization can be successful. A qualified team should be established and co-located to ensure that all personnel understand the overall objectives and the specific needs of all the specialties. The core of the team should transition from preparation of the solicitation to contract negotiations and then to contract administration. It also is essential for the team to have clear guidance, support, and access to senior management.

Risk Allocation. This is the single most important feature of the “deal” to be established. There must be an equitable allocation of risk between DOE and the contractor. The contractor must be held responsible for the risks that it can control—for example, technical and performance risks. DOE needs to be responsible for risks that it can control—for example, government-furnished items and minimum waste quantities.

Bridge to Privatized Service. In the TWRS privatization, the contractors will be paid a fixed amount for satisfactory completion and acceptance of all Part A deliverables (those that will define the technical, operational, regulatory, business, and financial elements). This payment approach is a key element in the privatization strategy because the Part B contractor(s) will receive no payments whatsoever until waste-treatment services are delivered and accepted, a period which could be as long as 8 to 10 years.

Regulatory Issues. Regulatory issues will be complex and require extensive time and resources to resolve. Transfer of regulatory oversight to an external regulatory agency, such as the Occupational Safety and Health Administration or the Nuclear Regulatory Commission, does not happen automatically. There may be jurisdictional issues as to Federal or State regulation, and the regulator may need resources to develop and enforce regulations (see the discussion later in this chapter). Resolution of these issues involves substantial time and effort.

Competition. Competition is broader than the number of contractors submitting proposals. In the TWRS instance, each of the contractor teams submitted two proposals, one for low-activity waste-treatment services only and one for low-activity and high-level waste-treatment services. These proposals provided the ideal combination for competition: one contractor team’s proposal embodied a new technology that offered the potential for significant performance improvements and reduced ultimate waste disposal requirements. Competition was further enhanced by the possibility of different services from each contractor (differing combinations of treatment of low-activity and high- activity waste) and the performance and business characteristics of each contractor’s proposals.

In addition, competition between the two contractors during Part A serves to maintain price competitiveness and fosters the likelihood of more favorable (to the Government) Part B terms and conditions. During Part A, the Government maintains the flexibility to select parallel solutions (low only, or combined low plus high) and has the right to authorize none, one, or both contractors to proceed with Part B.

Case Study 7: Privatization of Hanford Decontamination Laundry Facility

Background

The DOE Richland Operations Office in Washington State was faced with the need to replace the outdated Hanford Site’s 42-year-old government-owned, contractor-operated decontamination laundry facility. The estimated cost to build a new facility on the Hanford Site was more than $20 million. In an effort to find a more cost-effective solution to meeting Hanford’s decontamination laundry needs, DOE decided to issue a competitive solicitation to acquire offsite commercial laundry services.

The Hanford laundry processes 3 million to 4 million pounds of contaminated and noncontaminated clothing each year. Each washer has a 600-pound capacity

The Effort

A contract for laundry services was signed on August 5, 1992, with Interstate Nuclear Services of Springfield, Massachusetts. Groundbreaking for a new decontamination laundry, to be owned, built, and operated by Interstate Nuclear Services, took place in Richland in December 1992. In August 1993, one year after contract award, Interstate Nuclear Services’ Richland decontamination laundry facility began operating and accepting laundry from the Hanford Site as well as from other facilities. INS was responsible for obtaining all necessary licenses and permits for operating their facility.

INS provides cleaning, decontamination, and pickup and delivery services for personnel protection clothing and respirator masks for the Hanford Site. INS expects to process about 4.5 million pounds of laundry yearly at the Richland facility. Hanford’s decontamination laundry needs of approximately 3.1 million pounds represent almost 70 percent of the plant’s business; the remaining 30 percent comes from other entities, including the Washington Public Power Supply System and the Idaho National Engineering Laboratory.

Lessons Learned

By contracting with the private sector for decontamination laundry services, DOE is saving approximately $3 million per year in operating costs and has avoided spending more than $20 million to construct a new onsite decontamination laundry facility. As an additional benefit, a new business was attracted to the City of Richland and has created private-sector jobs and contributed to the city’s economic diversification efforts. Another benefit of the privatization of the Hanford decontamination laundry services is that it has allowed the Richland Operations Office to meet a Tri-Party Agreement milestone to discontinue laundry effluent discharge to the soil column ahead of the January 1995 deadline.

As one of the early privatization efforts, this project also demonstrated the need to involve affected stakeholders, including organized labor, early in the process. Since this project was conceived and implemented, Section 3161 of the National Defense Authorization Act for fiscal year 1993 was enacted. That provision’s requirements for work-force restructuring plans, with required consultation and notification, would have addressed many of the difficulties encountered during this privatization.

Case Study 8: Privatization of Power Facilities at Savannah River Site

Background

The DOE Savannah River Site (SRS), near Aiken, South Carolina, has a 70megawatt electric- and steam-generating powerhouse, more than 100 miles of electrical transmission lines, and 16 substations. These facilities were built in the early 1950s for power supply. Westinghouse Savannah River Company (WSRC) is the current management and operating contractor for the site.

The Effort

In late 1994, the DOE Savannah River Operations Office determined that the lowest cost for power to the site could be obtained through the privatization of onsite power production and transmission facilities. Privatization also would eliminate the need for an upgrade to the existing plant, a project that had been authorized for a total project cost of $91 million. In this case, the effort included aspects of two types of privatization—namely asset transfer and contracting out.

As the utility with legal territorial rights in this area, South Carolina Electric and Gas Company (SCE&G) was the only company from which DOE could purchase retail electricity. Therefore, a sole-source procurement action was pursued. Privatization was accomplished through a utility contract that included a 10-year lease for the site’s 484–D Powerhouse, supporting facilities, and steam pipelines, and a 40-year lease for transmission facilities and substations. Both leases were executed under the authority of section 161g of the Atomic Energy Act.

Based on the results of the first year of the contract, DOE projects that cost reductions for power and steam will exceed $150 million over a 10-year period. The management contractor projected a loss of 150 to 200 jobs; however, SCE&G would employ about 50 of these employees.

Current Status

The actual transfer of facilities to SCE&G occurred on October 1, 1995, and the necessary environmental permits were transferred shortly thereafter. Transfer of occupational safety and health jurisdiction was problematic. The State of South Carolina did not want to assume jurisdiction, and it took 7 months to work out the details of transfer to the Federal Occupational Safety and Health Administration (OSHA).

The first 3 months of billing for electricity and steam by SCE&G was approximately $5.4 million less than would have been billed by WSRC using fiscal year 1994–95 actual costing rates. The actual realized savings will be somewhat less due to direct transition costs and the general and administrative overhead costs of the management contractor, which cannot be fully eliminated. However, DOE expects actual savings to grow as transition activities are completed and overhead is reduced.

Lessons Learned

One of the lessons learned in privatizing the powerhouse at Savannah River is that if a potential privatization involves external regulation, the Department’s Office of Environment, Safety and Health and appropriate regulatory agencies must be notified and engaged very early in the privatization process.

Another lesson learned is that failure to properly communicate the Department’s intentions to organized labor, which had been employed in the maintenance of the facility for many years, has strained local labor relations.

A third lesson learned concerns theapplicability of the Davis-Bacon Act (see Key Legal Authorities, at the end of this chapter). The Department has taken the position that this privatization is an acquisition of utility services and not a contract to operate a powerhouse. The powerhouse is leased to SCE&G, who may choose to utilize the D-Area powerhouse to meet its contract obligations; however,SCE&G’s obligation to provide steam and electricity to the Savannah River Site is independent of the D-Area powerhouse lease. Because the utility service contract with SCE&G does not contain requirements for construction work, the Davis-Bacon Act does not apply.